Picking Apart the Dendreon Implosion (DNDN)

Dendreon Corporation (NASDAQ: DNDN) was supposed to be the Holy Grail when it comes to investing in a treatment for prostate cancer. The limited life-extension versus a high cost for the treatment is apparently just too much hype versus reality. The company, and its shareholders, are paying the price this morning for what were greater expectations than the company could deliver on. The reaction is so extreme that there has to be something more to the story than what the company discussed.

After the company reported its loss for the quarter, it withdrew its 2011 Provenge sales targets as the broader use of Provenge is just not growing as fast as it had expected previously. The company had previously given a range of $350 million to $400 million for 2011, but the risk was always there that the sales growth was very back-end loaded. For the quarter, sales of Provenge came to $49.6 million versus more than $58 million expected.

Dendreon still calls the potential market for Provenge to be substantial, but it is also trimming internal expectations for modest sales growth each quarter of this year. The company noted that a lack of understanding the insurance coverage regarding the $93,000 treatment cost is acting as a hurdle despite the acceptance of coverage by Medicare and Medicaid for men with advanced prostate cancer.

Provenge is different because it uses the body’s own immune system to attack cancer cells like they are a virus. If you are still hoping for explosive growth, you have to consider that its capacity expansion with the new sites in Atlanta and Los Angeles are already being met by expense cuts and job cuts as the company adjusts to lower demand expectations.

Analysts are trimming estimates now and it seems very unlikely that Dendreon will see the expected profits in 2012 where sales were previously expected to be around $866 million.

Dendreon shares closed at $35.84 and the 52-week range was $25.78 to $53.57. Shares are trading all the way down at $13.50 this morning on more than 1.4 million shares with over 90 minutes to go.

Such a huge downside reaction like this is a reaction that you would see if Medicare or Medicaid cut the expense reimbursement substantially or if the FDA placed even more restrictions on Provenge use. The market is treating this as though another shoe is going to drop. Stay tuned.